INSIGHTanalysis: Broadband To Be A Boon For Business

In its latest report, McKinsey estimates that by the mid-point of 2002, broadband networks had a reach of more than 300 million broadband households in the world’s twenty largest economies. Over 40 million households and businesses actually subscribed to broadband while in excess of 100 million people worldwide had access to it.

South Korea has the most highly developed infrastructure and highly centralised countries such as Belgium and Switzerland also figure highly in reach comparisons. Broadband is available in almost 90% of North American communities, equivalent to more than 100 million households.

The Reach Of Broadband In Major Economies
	Households
Country	Total (m)	% Of Total
South Korea	15.4	95
Argentina	4.4	94
Australia	7.3	93
Belgium	3.9	93
Switzerland	3.2	90
US	93.5	89
Canada	10.4	87
Spain	10.8	86
Japan	37.3	79
Sweden	3.1	77
Germany	28.2	74
Netherlands	5.2	74
France	17.3	73
Italy	14.8	70
UK	16.9	67
Brazil	16.9	36
Mexico	8.0	34
India	14.4	7
China	7.3	2
Russia	0.3	1
Source: McKinsey Quarterly, Q2 2002

At current rates of growth, broadband is set to have the fastest take-up rate of any consumer-orientated technology product. In the US, for example, it is likely to reach 25% penetration more quickly then either PCs or mobile phones did.

Not surprisingly, North America has the most broadband subscribers but market penetration is highest in South Korea, where more than half of all households have signed up to a high-speed internet service. The five countries with the highest number of broadband subscribers (US, South Korea, Japan, Canada, Germany) account for 84% of the global total.

Residential Broadband Subscribers In Major Markets
	Households
Country	Subscribers (000s)	% Of Total
South Korea	8,810	54.0
Canada	3,000	25.0
Sweden	560	14.0
Belgium	539	13.0
US	15,100	13.0
Netherlands	722	10.0
Japan	4,580	9.7
Switzerland	238	6.6
Germany	2,230	5.8
Spain	570	4.6
France	767	3.2
Australia	206	2.6
UK	619	2.5
Italy	409	1.9
Argentina	100	1.0
Mexico	180	0.8
Brazil	340	0.7
China	1,050	0.3
India	11	0
Russia	4	0
Source: McKinsey Quarterly, Q2 2002

Despite the well publicised malaise in the telecoms industry, the number of broadband subscribers in the countries studied increased by a quarter in the first six months of 2002. Even the mature markets of Canada, South Korea, Sweden and the US expanded by as much as a third. This ‘striking growth’ shows little sign of abatement as only in the most highly penetrated markets do those who have already switched to broadband outnumber those who are likely to do so.

It is fair to assume that if prices fall, there will be even more demand and the report suggests that internet users in countries with low narrowband penetration are going straight to broadband without ever subscribing to dial-up.

The launch phase According to McKinsey, analysis of the leading markets in 2002 shows that there are three phases to broadband development. These are launch, expansion and saturation and they tie-in roughly with the tier system adopted by eMarketer, which categorises countries according to their level of broadband uptake (see UK In Fourth Tier Of eMarketer’s World Broadband Comparisons).

A majority of countries are still in the early stages of broadband deployment with less than 10% of households signed up. These early adopters tend to have been lured by the prospect of fast download times and the need to free up telephone lines while surfing.

Within this scenario, the infrastructure is not fully developed and prices remain on the high side. At this point, broadband’s impact on industries outside the telecom and internet sphere is limited but businesses need to be prepared for change in the future.

Expansion A number of developed countries, including Japan, Sweden and most of the US, are in the expansion phase. Household penetration is in the 10-40% range and take-up is driven by “modern networkers”, a demographic group who can see the benefits of broadband but are more price sensitive and less “techie” than early adopters.

Competition ensures that there is significant marketing activity and different price schemes are available to suit users’ requirements. Companies are aware they have a responsibility to tailor their internet-related business to meet the needs of broadband users and partnerships with operators are seen as one way of achieving this.

Saturation Parts of the US and Far East trend setters such as South Korea and Hong Kong are reaching broadband saturation point. In these areas, more than 40% of all households have a broadband connection and there is strong competition between suppliers.

Cable companies tend to play an important role in these markets and access providers can raise their stock by offering “killer” online content via their networks. The McKinsey research suggests that many markets now in the expansion phase will likely become saturated within three years.

New revenue streams In some markets, broadband is starting to become profitable and leading network providers, notably telecoms and cable TV operators, earned $20 billion in revenues from high-speed internet access in 2002. Most companies have yet to see a return on their initial investment but conditions are improving and McKinsey speculates that the margins of the major cable providers’ broadband services could exceed those of conventional TV services this year.

Until now, fast and efficient access to the internet has been the major selling point of broadband. However, the report claims that network providers must successfully identify and market a “must have” utility that will maximise profits. Games, video-on-demand and home networking have all been touted as potential moneyspinners but nothing lucrative has emerged as yet.

The report states that: “Network operators, rather than striving to find new killer applications on their own, will have to collaborate with businesses in other fields to stimulate new content and applications. Such partnerships will probably involve the development of new business models to share revenues fairly.”

Broadband futures Even without new applications, the expanding broadband market is already proving beneficial to the internet economy (see INSIGHTanalysis: The Internet Approaches Maturity). The McKinsey study confirms that broadband converts spend more time online, buy more products over the web and are generally more satisfied than their narrowband counterparts.

Tech-savvy users are starting to look beyond chat and email facilities and are indulging in “peer-to-peer” applications. These involve the exchange among many locations or places in a single home of digital music, video and large data files. This has positive repercussions for the media and entertainment industries, assuming that a viable business model can be developed.

Broadband has also grabbed the intention of companies on a wider scale as it enables applications and large amounts of data to be centralised and made available to distant users with high-speed internet access. Financial companies, educational institutions, health care professionals and retailers could all see their daily workings transformed by broadband technology.

The study concludes that: “Leaders in every industry – not just telecommunications and media – should keep a close eye on the development of broadband in their markets to be ready for the moment when this technology starts to refashion their own value chains.”